Starboard Value Takes Roughly 6% Stake In Staples, Sources Say

David Benoit broke the news that Starboard Value LP had built a roughly 6% stake in Staples Inc., worth about $550 million, and increased its stake in Office Depot Inc. to about 10% from 8.6%, according to sources.

Starboard Value LP has built a roughly 6% stake in Staples Inc. and increased its position in Office Depot Inc. to about 10%, according to people familiar with the matter, moves that could increase pressure for a combination of the office-supply retailers.

Staples has a market capitalization of $9.2 billion, meaning Starboard’s stake in the Framingham, Mass., company is worth about $550 million.

The activist investor had a roughly 8.6% stake in Office Depot, which is based in Boca Raton, Fla., and has a market value of about $3.5 billion.

Starboard isn’t expected to spell out any changes it will push for in filings disclosing the stakes, expected Thursday.

But the industry has long been under pressure from shareholders and analysts to consolidate to compete better against a growing array of competitors such as Amazon.com Inc., Wal-Mart Stores Inc. and Target Corp. that offer consumers broad selections of products, including office supplies, at discounted prices.

Any combination could draw scrutiny from antitrust regulators as Office Depot and Staples are the last remaining major retail chains specializing in selling pens, binders, printers and the like.

In 1997, the Federal Trade Commission won a court ruling blocking an attempt by Staples to combine with Office Depot. But in a sign of how new competition has altered the industry, in November of last year the FTC allowed Office Depot to merge with OfficeMax Inc. without forcing them to shed any stores.

Amid the fierce competition, Staples’ sales have fallen this year and the company has been closing stores as it looks to cut out costs. It has also moved to expand its offerings and push aggressively into online retailing. Office Depot has also been shutting stores and cutting costs as it works through the integration with OfficeMax.

A report from Credit Suisse analysts in September said the chains still have a combined 3,000 locations, twice as many as the analysts said were warranted.

The report, which suggested a deal between Staples and Office Depot could lead to more than $1.4 billion in annual cost savings by 2017– equal to the bank’s estimate for the combined company’s entire profits that year–sent both stocks up sharply, in a signal investors believe in and applaud the possibility. Staples gained 8% the day of the report, and Office Depot rose 6%.

Staples shares are still down some 7% for the year, while Office Depot’s are up 27% in the wake of the OfficeMax deal.

The Credit Suisse analysts said they believe regulators would consider a broader set of competitors than just the office-supply stores in reviewing such a proposed merger, pointing to the FTC’s approval of the Office Depot-OfficeMax deal.

In its report last November, the FTC said the “current competitive dynamics are very different” from those in place when it had blocked Staples and Office Depot from getting together 16 years earlier. The regulator said consumers were less likely to turn to an office-supply store than another retailer selling a wider variety of wares. It specifically pointed to the impact of Amazon’s emergence on the industry.

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